OUTFRONT Media Inc. (OUT) Earnings Call Transcript & Summary

All right. Very pleased to have Jeremy Male, Chairman and CEO of OUTFRONT Media with us today. Jeremy, thank you so much for coming.

Great to be here.

Yes.

Let me put that...

Perfect. So 2022 just ended, and I would love maybe if you just took a second characterize how you would describe the performance of your firm over the last year? What went well? What didn't?

Yes. So -- and [indiscernible]

Yes.

So look, I think that '22 was a great year for the industry in general. I think the numbers look like industry is expected to be up around 20% in terms of revenue. Obviously, it's still coming back from COVID, but it's been a very sharp view for the industry, which I think is positive. And if you look at OUTFRONT in particular, we're up in that sort of 20-ish range, which is great. Strong growth in OIBDA. We were, I think, particularly given some of the macro headwinds. And in particular, if you think about the interest rate environment, I think to be able to maintain our AFFO guidance right the way through from that we go from mid-Feb throughout. I think it was something that we were very pleased to be able to do. It was -- '22 has been our strongest year in terms of organic growth of digital, which is a big driver for digital And it was also our strongest year in terms of tuck-in acquisitions. I think by the time the numbers come out for Q4, you'll see that we spent in the region of $400 million in terms of tuck-ins. So -- so if we take one step back and say how is '22, I'd characterize it as being really a great year for the company.

That's great. And just 2 follow-ups on that. The digital conversions, I get on the high M&A that you've had for many years in the past since your IPO. Was that a function of sellers wanting to sell because of some tax law changes or something like that? Or was it just happenstance that just there happened to be a lot of good assets on the market? What drove it?

I think there's a couple of things. I think the valuations actually -- because I think everyone felt that during COVID, you'll be able to go in and hover up a bunch of companies at low cost because they're all going to be under pressure financially, et cetera, et cetera. To be honest, that didn't really happen. But a number of conversations -- there was a lot of engagement over that time. Since we came out of COVID, it's fair to say, I think, that the market actually got quite frothy. So I think that from a seller point of view, it wasn't a bad time to sell. And then I think some of it has happened stance and that when you're waiting for a bus 2 ways from along at the same time, don't -- so I think that was a bit of that.

Okay. So I'm going to just confess something. This seems like about the most complicated ad environment I've ever experienced in that -- digital seems like it's really suffering the ad agencies guided even at the beginning of 2022 to much better numbers, they just seem to get better as the year went on, where they were raising their guidance. TV felt sort of flattish, nothing -- and so it's very hard to get a simple pulse on what's really going on because the dynamics in each one of these verticals are so different. So I would just love if you could just spend a second and am I crazy? Or is this sort of an unusual ad market? And how would you characterize sort of outdoor's performance within that, trying to look through the sort of easy COVID comps, if that makes sense?

Yes. Look, I think it is a very -- I think it is a very complicated ad market, to be honest. You look back to sort of middle of last year, whatever I mean our frustration would be that Snap had come out with whatever some dreadful set of numbers. And our stock would be down 10%. I think we'll hang on a sec, really, is there a real correlation there. So I mean let's start with digital. I mean the fact of the matter is that there's that's a market that, to some extent or rather has been disruptive with new entrants. You've got the likes of the TikTok, even though they're only at 2% or 3% market share. I mean it's still 2% or 3% of a big market. It's a lot -- you've then got the complications of IDFA and what what's going on there. And I don't think that's got a long way to play. I mean we saw the ruling yesterday in Europe, EU with regards to Meta, et cetera. That's got a long way to play out. It was interesting that also, I think, reported yesterday Google and Meta combined were less than 50% of the ad market when there for the first time since digital-market [ since 2014. ] So lots going on there. In terms of TV that you mentioned, yes, [ plantation ]. Look, TV will continue to be a usually important part of our market forever. But if you look at the audience issues, and therefore, inflationary environment, I do think that, that will, to some extent, or rather be beneficial to out of home. So if we take one step back and say, okay, what's going on in out-of-home. I think the first thing would be to say is that we're not in a vacuum. We haven't got a [indiscernible] if there's a particular change in macro, are we impacted. Yes, probably. But if you look at the drivers of [indiscernible], which is the fact that we're delivering more audiences today than we were before. So we don't have an audience issue. We have incremental inventories through digitization. We have incremental flexibility through digitization. If you think what we're very good at doing, which is stimulating online behavior, I mean, which is very important to a number of advertisers right now. you think of the flexibility that we now have. I think that within today's media environment, say, absent some downturn that, frankly, I -- we can't really see right now. And by that, I mean, the sort of downturns that everyone wants to point to, the GFC or [indiscernible] I think in a reasonable macro environment. out-of-home can continue to grow this year. If you look at the most recent Magna numbers, I believe that ad market is expected to grow in '23 by 3.7%, absent if you -- that's an absolute term, a little bit higher than that if you take out the cyclical, whereas a cyclical...

You mean Olympics and political. Okay.

Whereas out-of-home is slated to grow by 6.7%. Now as we know, trying to forecast media has always been a bit of a mug game. But directionally, I think that suggests that out-of-home is likely to grow share this year. And I think we can all feel some confidence from that Magnum reduction.

That's great. Let me -- you said -- I guess one of the other things that I find very confusing is the last 2 recessions that were induced by COVID and the GFC were extreme, to say the least. And therefore, it makes it, I think, a bit more challenging for investors to sort of even wrap their head around a normal recession or whatever that is. So maybe can you provide just a little bit of context given your history in the industry, if we go back to, I don't know if you call a one normal or I don't even know when the recession was prior to that '91. What happens in outdoor in a normal recession?

So in a normal recession, I think we have to go back to 2001.

Yes.

Something like that. So out-of-home was flattish to up 1%, I think, depending on which market you're in, I think it's about plus 1 in the U.S., which did significantly better than the -- that ad market as a whole, which was down in sort of high single digits in that year. Now having said that, the industry was in a very different spot there. I mean, it was half the size. It's a $4 billion or $5 billion industry. There's no digital in it at all. There was no measurement -- efficacy of relatively, lower efficacy of the medium. So I'm not sure. And one, I don't know. I just don't know how much we can absolutely learn from that. But I think what we -- if there is a learning, it was out-of-home performed generally better than other media in a normal recession.

And what would you chalk that up to? Is it contract length? Is it mix of local? Is it your relatively low pricing on a CPM basis vis-a-vis many alternatives. What...

All of the above.

All of the above.

Yes, I think the fact that we are sort of fairly low CPM. I think the fact that we are as an industry, we're more disposed towards local and national, and local tends to be stickier for all sorts of different reasons. And one of the reasons is that contract length that you referred to because within local we have a lot of, what we call permanent business, which is more like signage type business, turn left, whatever it is, [ Jose Mufflers ] or whatever. So I think all of that sort of comes into play, Jason.

Okay. That's great. What about digital conversions? Maybe you could just remind us or just frame it in terms of the percentage or facings that are digital, the percent of your revenues that are digital? And what do you see happening sort of in the near term and even the long term in terms of what digital could become as a part of the overall portfolio?

Yes, absolutely. So digital has been a huge driver of growth for us over the last sort of 2 or 3 years. And indeed, the inventory, it's certainly, the industry is the fastest-growing part of Street for sure. So if we think about the -- take one step back, at the moment, the U.S. out-of-home industry is 30-ish percent digital. And the major players have all converted sort of 3-ish, 3% to 4% of the inventory. And then if you look abroad and take other markets like the U.K. and Australia, there digital is north of 50% of the out-of-home market. So we're [ 30 ] and that's [ 50 ], we're going to move towards that over time. It's difficult to say, is it going to be 3, 5 or 7 years by the time we get that. And we will continue to convert inventory? And where do we end up if we're sort of 3% or 4% now? Maybe it's -- maybe it's 7% or 8% in x years from now.

Of the inventory.

Of the inventory. And by then, we'll be knocking on the door probably of about 50% of revenues. Now that's what it looks like today. And as of today, the metrics that we've been using for a number of years are still very much holding true, which is that we look to make a kind of a minimum return of around 20% IRR. The way that sort of bounces out is we make about 4x revenue on average, and our costs are about 2x to 2.5x So it's also a good thing from a margin point of view, it's a margin driver for us as well. Those numbers have held firm for a number of years. As time goes on, does, I guess, a couple of things that can happen, does demand change that might put -- might make you put the brakes on in terms of that investment. Does demand increase or does cost of input increase. So for example, does the cost of digital design itself change. I mean, I'm sure it's not going to be absolutely linear, don't mean because things will change around the edges. But from where we're at, we believe that the best dollar that we can spend right now is on organic digital development.

And one of the things that, I guess, I'll confess is that when digital first started rolling out, I wouldn't have thought it would have been a 20-year journey from beginning to end, I would have thought it would have been less than that. Is the pace of function purely of the regulatory constraints? Or is it a function of regulatory plus sort of needing to have the -- give the market time to absorb the extra supply that comes in. And so you're sort of walking this line where you sort of -- there's some balancing act, if you will?

Well, I think you've hit the 2 points that key to digital deployment. I think the first one is probably the most important, which is regulatory, which is [indiscernible], not everyone wants to digital, but at the end of the street. And just -- so we have to work around that. I mean there are still some counties and still a couple of states that where you can't deploy digital at all. So I think that is the prime factor here. And then there is the fact that if you converted 15% of your inventory in a particular market to digital, you doubled your supply. So we also have one eye, if you like, on the supply side in given markets here.

Okay. Okay. But maybe just back of the envelope 7, 8 years, sort of the horizon that we should be thinking about in terms of from where we are now.

I would suspect that the industry can certainly move in the same direction for the next summer years as it has in the last 3 to 5 [indiscernible]

Okay. that's great. Now what -- maybe if we can just touch on programmatic. Maybe you can just remind us what programmatic is. Why is it important to you? And how big do you think it can become as a part of your digital revenues?

So -- I guess for us, firstly, maybe let's define programmatic. I think if you look at -- if you think about programmatic generally in the media industry, that it almost always involves sort of real-time bidding and RTB mechanism within that. For us, programmatic means more automated transaction. which may or may not include some sort of real-time bidding element to it or it might be what we call a PMP deal or private marketplace still where effectively, we've got agreed pricing, but it's just traded in a more connected electronic way. We are excited by programmatic. We think that it will be a tailwind for the industry. For us at the moment, it's still a relatively small piece of our digital sales. It's kind of in the 5-ish percent -- 5-ish percent range, which means that therefore, in total of our business, it's a couple of points of total revenue. But undoubtedly, it's going to, we believe, increase over time we like it. We're -- most of our inventory is now exposed to a number of different platforms. Our transit industry is just going through the process of becoming exposed to the programmatic buy side. And yes, excited about it, supported by it. But for now, it's a relatively small piece of the hole.

Any margin implications as programmatic becomes larger?